While it may seem that the semiconductor stocks have all been moving in a parabolic swing higher forever, the reality is that over the past three years the compounded annual growth rate for the segment has limped along at a very sluggish 2%. The analysts at BofA Securities point to simmering and ongoing trade tensions, the global pandemic and a maturing 4G smartphone cycle as the main reasons for the slow growth.
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The good news for investors is the BofA Securities team is very positive for 2021. They see growth jumping to a massive 8% compounded annual growth rate from calendar year 2020 to 2022, and in a new research report they detail these reasons for the firm’s very bullish forecast:
- Global gross domestic product jumping to 5.4% in 2021. The highest since 1973.
- Very lean investors across the sector.
- Enhanced investments in 5G as phone units grow two times year over year.
- Semiconductor manufacturing reshoring
- Secular tailwinds from AI, gaming, IoT and digitization of the global economy
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While the ongoing impact from the COVID-19 pandemic is still a wildcard, and rising interest rates could affect trading multiples, the analysts feel that investors will look to the semiconductor space as a way to boost what they call “high-quality alpha generation.”
BofA Securities combines both semiconductor and semiconductor capital equipment in the research report. Here we focus on the four top picks for the semiconductor capital equipment companies. The top companies all got a huge boost last week when Taiwan Semiconductor announced a massive increase in capital expenditures. The company reported capex last year of about $17.8 billion and forecast spending in 2021 in the range of $25 billion to $28 billion.
While all four of the picks are rated Buy at BofA Securities, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Applied Materials
This is one of the premier semiconductor capital equipment stocks and is a great tech addition for more aggressive investors. Applied Materials Inc. (NASDAQ: AMAT | AMAT Price Prediction) provides manufacturing equipment, services and software to the semiconductor, display and related industries. It operates through three segments.
The Semiconductor Systems segment develops, manufactures and sells various manufacturing equipment that is used to fabricate semiconductor chips or integrated circuits. This segment also offers various technologies, including epitaxy, ion implantation, oxidation/nitridation, rapid thermal processing, physical vapor deposition, chemical vapor deposition, chemical mechanical planarization, electrochemical deposition, atomic layer deposition, etching and selective deposition and removal, as well as metrology and inspection tools.
The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity comprising spares, upgrades, services, remanufactured earlier generation equipment and factory automation software for semiconductor, display and other products.
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The Display and Adjacent Markets segment offers products for manufacturing liquid crystal displays, organic light-emitting diodes and other display technologies for TVs, monitors, laptops, personal computers, electronic tablets, smartphones and other consumer-oriented devices, as well as equipment for processing flexible substrates.
Applied Materials stock investors receive just a 0.81% dividend. The BofA Securities price target for the shares is $115, while the Wall Street consensus target is down at $98.84. The stock closed trading on Tuesday at $109.22 a share, after a gain of almost 6% for the day.
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KLA
This is another strong large-cap play for investors looking for exposure to capital equipment. KLA Corp. (NASDAQ: KLAC) designs, manufactures and markets process control and yield management solutions worldwide.
It offers chip manufacturing products, such as front-end defect inspection tools, defect review systems, advanced packaging process control systems, metrology solutions, in-situ process monitoring products and lithography software; wafer manufacturing products comprising surface and defect inspection, wafer geometry and nanotopography metrology and data management; and reticle manufacturing products, such as defect inspection and pattern placement metrology products.
The company also provides light emitting diode (LED), power device and compound semiconductor manufacturing products consisting of patterned wafer inspection, defect inspection, surface metrology and data management products; thin-film head metrology and inspection, virtual lithography, in-situ process monitoring, transparent and metal substrate inspection and data management products for data storage media/head manufacturing; and stylus and optical profiling and optical inspection products for microelectromechanical systems manufacturing, as well as products for general purpose/lab applications.
Many analysts feel that KLA is less cyclical than peers with best-in-class returns. The company’s purchase Orbotech two years ago added growth and diversity and sales and earnings per share accretion. Risks for the shares include industry cyclicality, relatively muted growth and limited operating leverage.
Shareholders receive a 1.24% dividend. The BofA Securities has a $315 price target, and the consensus target is much lower $272.60. The last trade on Tuesday came in at $314.08.
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Lam Research
This remains one of the top chip equipment picks across Wall Street and the stock was up big on recent bullish reports. Lam Research Corp. (NASDAQ: LRCX) designs, manufactures, markets, refurbishes and services semiconductor processing equipment used in the fabrication of integrated circuits worldwide.
The company offers ALTUS systems to deposit conformal films for tungsten metallization applications, SABRE electrochemical deposition products for copper damascene manufacturing, SOLA ultraviolet thermal processing products for film treatments and VECTOR plasma-enhanced chemical vapor deposition atomic layer deposition products.
Lam Research also provides SPEED gapfill high-density plasma chemical vapor deposition products and Striker single-wafer atomic layer deposition products that provide multiple dielectric film solutions. In addition, the company offers Flex for dielectric etch applications, Kiyo for conductor etch applications, Syndion for through-silicon via etch applications and Versys metal products for metal etch processes.
Lam Research’s Coronus bevel clean products enhance die yield. Its Da Vinci, DV-Prime, EOS and SP address a range of wafer cleaning applications, and Metryx mass metrology systems offer high precision in-line mass measurement in semiconductor wafer manufacturing.
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Shareholders receive a 0.90% dividend. The $590 BofA Securities price target is well above the $492.17 consensus price objective. Lam Research stock closed on Tuesday at $580.02, up almost 6% on the day.
Teradyne
This lesser known semiconductor capital equipment leader also could have solid upside potential and may offer some of the best value in the industry. Teradyne Inc. (NYSE: TER) is a supplier of automation equipment for test and industrial applications.
The company designs automatic test systems used to test semiconductors, wireless products, data storage and electronic systems in the consumer, wireless, auto, industrial, computing, communications and aerospace/defense markets. Industrial automation products include collaborative robots used by global manufacturing and light industrial customers to improve manufacturing efficiency and reduce costs.
Many analysts on Wall Street point to the company as a somewhat ancillary play to the sector and have often cited the growing robotics silo as more of a reason to own the shares than the fundamentals related to wafer fab equipment. The company also has consistently bought back its shares.
BofA Securities lifted its $125 price target to $150. The consensus target is $119.21, and Teradyne stock was last seen on Tuesday at $140.63.
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These four top companies are executing well and still look to have very solid upside to the BofA Securities price targets. Their stocks are better suited for accounts with a somewhat higher risk tolerance, as they could be a touch more volatile, given the solid runs they have all made. Due to those large moves, it may make sense to scale buy shares, in case we get a sizable sell-off.
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